UK-US agreement strengthens UK ability to tackle tax evasion

The Government has this week signed an agreement with the United States to improve international tax compliance and implement FATCA.

The Government has this week signed an agreement with the United States to improve international tax compliance and implement FATCA.

This is the first agreement of its kind, benefiting UK financial institutions by addressing their legal concerns with complying with FATCA and reducing the burdens imposed on them. It also boosts HMRC’s ability to obtain information from the US to help in tackling UK tax evasion.

The UK-US agreement follows the Joint Statement made in July 2012 by the governments of France, Germany, Italy, Spain, the United Kingdom and the United States, announcing the publication of the Model Intergovernmental Agreement to Improve Tax Compliance and to Implement FATCA.

The signing of the agreement follows the conclusion of negotiations on the UK-specific Annex II. This sets out UK institutions and products which are seen as presenting a low risk of being used to evade US tax and are therefore effectively exempt from FATCA requirements.

ensures that withholding tax will not be imposed on income received by UK financial institutions or on payments they make

ensures that the burdens imposed on financial institutions are proportionate to the goal of combating tax evasion

establishes a reciprocal approach to FATCA implementation

Having signed the agreement on behalf of the UK, David Gauke, Exchequer Secretary to the Treasury, said:

This agreement demonstrates our commitment to working internationally to tackle tax evasion. It is the first of its kind and represents a significant step forward in the scope and nature of information exchange between governments. Furthermore, the changes we have achieved to FATCA implementation will provide significant benefits to UK financial institutions.

The agreement has been laid before the Houses of Parliament and will undergo a 21 sitting day scrutiny period as part of the ratification process. Financial institutions and other interested parties will now be consulted on the implementation of the Agreement in the UK and draft legislation will be published later in 2012.

Notes for Editors

FATCA, which is part of the US Hiring Incentives to Restore Employment Act of 2010, aims to combat tax evasion by US tax residents using foreign accounts. It includes certain provisions on withholding taxes and on the reporting of information by foreign financial institutions for US tax compliance purposes. These give rise to certain legal difficulties and administrative burdens for financial institutions.

In order to address these issues, the Governments of France, Germany, Italy, Spain and the UK, with the support of the European Commission, have taken part in joint discussions with the US Government to explore a practical way forward that supports the overall aim to combat tax evasion, while reducing the risks and burdens on financial institutions.

This approach focuses on the use of existing tax treaties for information exchange between tax authorities, rather than direct reporting by financial institutions to the US Internal Revenue Service. A wider scope of information than before will be exchanged and on an automatic basis.

The agreement is also reciprocal. The US Treasury has recently issued final “bank deposit” interest regulations that will substantially increase the amount of information the US collects, which they will then share with the UK where it concerns UK residents.

While legislative constraints in the US mean that the authorities there are unable to collect certain information, most notably with regard to entities, they are providing the UK with a wider scope of information on individual accounts than we are providing them. Furthermore, the Agreement contains a commitment by the US Government to pursue equivalent levels of information exchange.